Amazon confirms the terms of its declaration of war on Netflix

Amazon has finally confirmed what was Hollywood‘s worst kept secret: that its Amazon Prime customers will be able to get some online video for free, just like the DVD rental customers of Netflix can get online video for free.

To us this looks like an early experiment, and Amazon is thought to have about two million Prime members worldwide, bringing in around $79 a year – so the programme has around $158m in total. This is a low number compared to the 20 million that are signed up to one service or other at Netflix, each paying at least $7.99 a month (around $96 a year), making that around a $2bn wad of cash. It's hard to compare the two or see how one can become something like the other.

The Netflix deals lets consumers watch a certain number of minutes a month, depending upon their level of investment, but ALL its online content is far greater in depth of selection: around 5,000 for Amazon, out of its total library of 90,000, but something like 12,000 and rising from Netflix online out of a DVD library of over 100,000 titles.

The numbers are comparable but slanted in favour of Netflix. Of course the precise list of video available, how up-to-date it is and how stable it is (Netflix has been accused of swapping assets on and off the online list) is perhaps more important. Eventually Netflix will make all of its titles available online, but Amazon, which offers both pay-per-view rental and purchase for these assets, is unlikely to be able to shift too aggressively in that direction – partly due to limited content rights.

However with the purchase of LoveFiLM – and if we‘re right the possibility that Amazon will bid for the French and German equivalents – it immediately has a similar free offer to LoveFiLM's 1.6 million customers, effectively almost doubling its reach overnight, and for this its video mix can be determined by the rights which LoveFiLM has, rather than renegotiated rights from the US to Europe.

Amazon Prime was designed to offer two-day free shipping regardless of minimum purchases, as well as discounted priority shipping rates. Amazon launched the programme in the US back in 2005; in Japan, the UK, and Germany in 2007; and in France as Amazon Premium in 2008. That gives a perfect footprint for its content acquisition strategy.

Clearly there is a big calculation that Amazon has made to work out how much money it will lose on delivery if it delivers every purchase for free, against that $158m of income. It can certainly go back to the drawing board if it needs to re-calculate in order to cover the cost of paying for content which is delivered for free.

However one interesting statistic is that anyone who joins Amazon Prime spends roughly double in the following year, and that some 92 per cent of them reckon they get value out of the service and plan to renew – so there is money to be had there to pay for Amazon content out of extra sales profits.

That's a good basis for extending it, and surely "Join Amazon Prime, get free online video" is as good a proposition as any for increasing its membership, as are recommendations that read, "You have chosen to buy XYZ DVD, if you join Amazon Prime now you can view this for free online any time".

So with billions of transactions a year, we can expect that raising Amazon Prime membership slowly and carefully from around 2 million today (a number calculated by Piper Jaffrey analyst Gene Munster, who says right now it's growing at 24 per cent per annum) to something close to 20 million, sounds possible, as long as Netflix doesn't become too aggressive, too quickly, internationally.

Already Amazon has a similar device profile to Netflix for viewing movies including Macs, PCs and some 200 models of internet-connected TVs, Blu-ray players and set-top boxes, because it did all that work with what was once called Unbox video and is now called Amazon Instant Video.

Amazon says that the 5,000 new movies include The Girl with the Dragon Tattoo, Amadeus, Syriana, and Chariots of Fire; documentaries such as March of the Penguins; and TV shows including Doctor Who and Fawlty Towers. These appear to be older classics for the most part and the result of recent separate negotiations from the content filling its Instant Video offering.

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